US embassy cable - 05ATHENS892

UNCLAS ATHENS 000892 
 
SIPDIS 
 
TREASURY FOR IMI 
COMMERCE FOR 4212/ITA/MAC/EUR/CALVERT 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, GR 
SUBJECT: VAT, CIGARETTE AND ALCOHOL TAX HIKES TO BRING DOWN 
RUNAWAY DEFICIT 
 
SUMMARY: 
 
On March 30, the GoG announced an immediate increase in 
VAT rates as well as taxes on alcohol and cigarettes as part 
of a series of measures designed to help Greece meet the EC's 
2006 deadline for bringing its deficit under three percent of 
GDP.  A one percentange point increase in the VAT rate for 
most goods (from 18 to 19 percent) combined with increased 
excise taxes on cigarettes and alcohol and income from 
privatization is expected to generate enough income  for 
Greece to meet the EC's deficit target.  The government 
insists that the VAT and excise tax increases will be the 
last for the foreseeable future.  Consistent with its policy 
of "mild adjustment", the government has promised that no 
cuts would be made on health, education and other social 
expenditures.  End Summary. 
 
VAT Increases 
------------- 
 
On March 30, Minister of Economy and Finance Alogoskoufis 
revealed Greece's updated Growth and Stability program for 
2005-2007.  A combination of VAT and excise tax increases and 
anticipated income from privatization, totaling about 4.1 
billion euros (about 3.1 percent of GDP), is expected lower 
Greece's budget deficit from the current 6.1 percent of GDP 
to 3.5 percent in 2005 and 2.8 percent in 2006.  About 1.5 
billion euros are expected to be generated from VAT 
increases.  Effective as of April 1, the standard VAT rate 
for most goods, now 18 percent, will rise to 19 percent.  VAT 
on food, fuel, medicine and various services (i.e., public 
transportation and hotel costs) will go up from 8 to 9 
percent.  The lowest VAT rate of 4 percent, applied to 
newspapers, books and the sale of cinema and theater tickets, 
will go up to 4.5 percent. 
 
--and "Sin" Taxes 
----------------- 
 
A 65 percent increase in the tax on cigarettes is 
projected to yield to 375 million euros in 2005-2006. 
Foreign cigarette manufacturers fear that the tax will 
increase the demand for low priced, mostly domestic brands 
(selling for about one euro per pack) as opposed to more 
expensive imported bands, selling for up to 3 euros a pack. 
Foreign cigarette manufactures  (Phillip Morris and 
Britsh-American Tobacco) claim about 60 percent of the Greek 
market, but are losing ground to cheaper domestic brands and 
contraband cigarettes.  Phillip Morris recently introduced 
its own low-priced "Next" brand to counter the competition. 
 
The excise tax on most alcoholic beverages will increase 
by 20 percent, yielding about 80 million euros of revenue in 
2005-2006.  The tax doens not apply to wine and beer. An 
increase of only 10 percent will be applied to traditional, 
locally produced Greek beverages (ouzo, tsipouro, and 
tsikoudia). 
 
SIPDIS 
 
Cumulatively, the revenues from VAT and excise taxes 
amount to 2.67 billion.  The GoG expects to earn an 
additional 1.5 billion euros from anticipated privatizations 
and certain expenditure cuts (such as the elimination of the 
public investment program), bringing the total to just over 
4.1 billion - enough to allow Greece to meet the three 
percent budget cap by 2006 if all else remains the same.  The 
government has assured the public that no major cuts would be 
made in health, education and social insurance programs. 
 
Comment 
------- 
 
The government's revenue measures have encountered 
(predictable) sharply negative reactions from the PASOK 
opposition and the trade unions - not to speak of the average 
Greek consumer. (Greeks are the world's heaviest smokers 
after the Cubans).  In spite of the grumbling, many 
understand that that tax measures were inevitable and the 
result of pressure from the EC.  Most Greek officials are 
confident that the Ecofin will accept Greece's revised 
Stability and Growth program, especially since the country 
has bitten the bullet and complied with the EC's 
recommendations for increased taxes.  The risk for the Greek 
economy, according to some observers, is that rising the VAT 
and indirect taxes could boost inflation and slow down 
economic growth.  (The GoG is hoping to achieve a 3.9 growth 
rate this year.)  There is also concern that wholesalers and 
retailers and will use the tax hikes as an excuse to raise 
prices beyond what is required. End Comment.